New Delhi |Oct 15, 2025 | BeyondborBersbyJwala
The 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, popularly known as the Nobel Prize in Economics, has been awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their groundbreaking work in explaining how innovation drives sustained economic growth. The Royal Swedish Academy of Sciences announced that Mokyr would receive one half of the prestigious award, with Aghion and Howitt sharing the other half for their complementary contributions.
Their collective research addresses a fundamental question: What transformed centuries of economic stagnation into the unprecedented, sustained growth witnessed over the last two centuries? The laureates, through historical analysis and mathematical modeling, provide critical insights into how societies can foster innovation for future prosperity.
Mokyr: The Bedrock of "Useful Knowledge"
Professor Joel Mokyr, born in the Netherlands in 1946 and currently a professor at Northwestern University, was recognized "for having identified the prerequisites for sustained growth through technological progress." His extensive research in economic history posits that a continuous flow of "useful knowledge" is essential.
Mokyr categorizes this knowledge into two parts:
Propositional knowledge: Understanding why something works (e.g., theories about the natural world).
Prescriptive knowledge: Practical instructions or methods describing how to make something work (e.g., instruction manuals).
He argues that before the Industrial Revolution, innovators often had strong propositional knowledge but lacked a robust foundation of prescriptive knowledge, making it difficult to build upon existing discoveries. This changed dramatically in the 16th and 17th centuries with the rise of precise measurement, controlled experiments, and an emphasis on reproducible results. This improved feedback loop between propositional and prescriptive knowledge, as seen in the continuous refinement of the steam engine or advances in steel production, was crucial for accelerating innovation.
Policy Implications from Mokyr's Work: Mokyr’s research offers clear policy directions:
Investment in Skilling: Brilliant ideas remain dormant without the practical, technical, and commercial knowledge to bring them to fruition. He highlights Britain's early success due to its abundance of skilled artisans and engineers. This implies that governments must heavily invest in education and vocational training for sustained growth.
Openness to Change: Innovation inevitably creates "creative destruction" – new technologies replace old ones, leading to both winners and losers. Societies must be open to this change, overcoming resistance from established interest groups to allow progress to flourish.
Aghion & Howitt: Modeling "Creative Destruction"
Philippe Aghion (born 1956, France, professor at Collège de France, INSEAD, and LSE) and Peter Howitt (born 1946, Canada, professor at Brown University) jointly received their half of the prize "for the theory of sustained growth through creative destruction." They developed a mathematical model to quantitatively explain how technological advancement, driven by this process, leads to sustained economic growth.
Their model outlines a dynamic where companies invest in R&D to create patented, monopolistic products. However, this monopoly is temporary; another company’s R&D can yield a superior product, displacing the incumbent and capturing market profits. This continuous cycle of innovation and displacement is the essence of "creative destruction."
Subsidizing R&D: A Balancing Act: Aghion and Howitt’s model allows for the analysis of optimal R&D investment in a free market. They identified two opposing forces regarding R&D subsidies:
Under-investment Risk: When a new innovation replaces an old one, the societal benefits of the older technology (e.g., its underlying knowledge) often persist even if its creators no longer profit. This "spillover" effect suggests that private companies might under-invest in R&D from a societal perspective, implying a need for subsidies to encourage innovation.
Over-investment Risk: Conversely, a new "top-tier" innovation might offer only incremental improvements over existing technology. While the innovating company reaps significant profits, the societal gain from this marginal improvement might be limited. In such cases, R&D investment could be "too high" from a societal viewpoint, suggesting that subsidies might not always be optimal.
The ideal level of R&D investment will vary, but Aghion and Howitt's theoretical framework provides invaluable tools for policymakers to understand these complex dynamics and design effective measures to achieve optimal, sustained growth.
The work of all three laureates offers profound insights into the historical drivers of prosperity and provides a roadmap for fostering innovation in an ever-evolving global economy.
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